FIN534 Midterm Exam

Course: Financial Management F IN 534

Test:Week 5 Midterm Exam

InstructionThis exam consists of 25 multiple choice questions and covers the material in chapters

1, 2, 7 and 8. 

Question 1

4 out of 4 points

 The discount rate assigned to an individual project should be based on   
 Correct Answer: the risks associated with the use of the funds required by the project.   

Question 2

4 out of 4 points

  
 The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?I. Firms that have a 100-percent retention ratioII. Firms that pay an unchanging dividendIII. Firms that pay a constantly increasing dividend IV. Firms that pay an erratically growing dividend   
 Correct Answer: II and III only   

Question 3

4 out of 4 points

  
 The pre-tax cost of debt    
 Correct Answer: is based on the current yield to maturity of the firm’s outstanding bonds.   

Question 4

4 out of 4 points

  
 Total risk is measured by _____, and systematic risk is measured by ____.   
 Correct Answer: standard deviation; beta   

Question 5

4 out of 4 points

  
 The excess return earned by a risky asset, for example, with a beta of 1.4, over that earned by a risk-free asset is referred to as a   
 Correct Answer: risk premium.   

Question 6

4 out of 4 points

  
 The after-tax cost of debt generally increases whenI. a firm’s bond rating improves.II. the market-required rate of interest for the company’s bonds increases.III. tax rates decrease.IV. bond prices rise.   
 Correct Answer: II and III only   

Question 7

4 out of 4 points

  
 Which one of the following is a source of cash?   
 Correct Answer: increase in accounts payable   

Question 8

4 out of 4 points

  
 Depreciation expense   
 Correct Answer: reduces both taxes and net income.   

Question 9

4 out of 4 points

  
 Which of the following is NOT a major category on the cash flow statement?    
 Correct Answer: Cash flows from selling activities   

Question 10

4 out of 4 points

  
 A balance sheet reports the value of a firm’s assets, liabilities, and equity   
 Correct Answer: at any point in time.   

Question 11

4 out of 4 points

  
 The sources and uses of cash over a stated period of time are reflected in the   
 Correct Answer: cash flow statement.   

Question 12

4 out of 4 points

  
 Which of the following is NOT a typical reason for differences between profits and cash flow?    
 Correct Answer: Goodwill   

Question 13

4 out of 4 points

  
 In comparison to industry averages, Okra Corp. has a low inventory turnover, a high current ratio, and an average quick ratio. Which of the following would be the most reasonable inference about Okra Corp.?   
 Correct Answer: Its inventory level is too high.   

Question 14

4 out of 4 points

  
 On a common-size balance sheet, all accounts are expressed as a percentage of   
 Correct Answer: total assets.   

Question 15

4 out of 4 points

  
 A times-interest-earned ratio of 3.5 indicates that the firm   
 Correct Answer: has EBIT equal to 3.5 times its interest expense.   

Question 16

4 out of 4 points

  
 Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm’s financial ratios?   
 Correct Answer: increase in the inventory turnover rate   

Question 17

4 out of 4 points

  
 Primavera Holdings has a profit margin of 25%, an asset turnover of 0.5, and financial leverage (assets to equity) of 1.5. Primavera has $20 billion in assets, of which half, is in cash and marketable securities. Assume that Primavera earns a 3 percent after-tax return on cash and securities. What would Primavera’s return on equity be if it paid out 90% of its cash and marketable securities as a dividend to shareholders?   
 Correct Answer: between 40% and 60%   

Question 18

4 out of 4 points

  
 At the end of 2017, Stacky Corp. had $500,000 in liabilities and a debt-to-assets ratio of 0.5. For 2017, Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2017?   
 Correct Answer: $3,000,000   

Question 19

4 out of 4 points

  
 Ptarmigan Travelers had sales of $420,000 in 2016 and $480,000 in 2017. The firm’s current asset accounts remained constant. Given this information, which one of the following statements must be true?   
 Correct Answer: The collection period decreased.   

Question 20

4 out of 4 points

  
 Which of the following statements related to the internal rate of return (IRR) are correct?   I. The IRR is the discount rate at which an investment’s NPV equals zero. II. An investment should be undertaken if the discount rate exceeds the IRR. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. The IRR is the best tool available for deciding between mutually exclusive investments.   
 Correct Answer: I and II only   

Question 21

4 out of 4 points

  
 You are to receive an annuity of $1,000 per year for 10 years. You will receive the first payment two years from today. At a discount rate of 10%, what is the present value of this annuity?   
 Correct Answer: $5,585.97   

Question 22

4 out of 4 points

  
 Which of the following should be included in the cash flow projections for a new product? I. Money already spent for research and development of the new product II. Capital expenditures for equipment to produce the new productIII. Increase in working capital needed to finance sales of the new product IV. Interest expense on the loan used to finance the new product launch     
 Correct Answer: II and III only   

Question 23

4 out of 4 points

  
 Which of the following is NOT an important step in the financial evaluation of an investment opportunity?   
 Correct Answer: Estimate the accounting rate of return for the investment.   

Question 24

4 out of 4 points

  
 When making a capital budgeting decision, which of the following is/are NOT relevant? I. The size of a cash flowII. The risk of a cash flowIII. The accounting earnings from a cash flow IV. The timing of a cash flow   
 Correct Answer: III only   

Question 25

4 out of 4 points

  
 EAC Nutrition offers a 9.5-percent coupon bond with annual payments maturing 11 years from today. Your required return is 11.2 percent. What price are you willing to pay for this bond if the face (or par) value is $1,000?    
 Correct Answer: $895.43